Spain's political deadlock at critical point as Socialists decide future

MADRID (Reuters) - Spain's bitterly divided Socialists met on Saturday to decide whether to oust party leader Pedro Sanchez, a step that could pave the way for a new government to be formed after months of political deadlock.

The leadership of the Socialist PSOE, Spain's main opposition party, has been split in two by the resignation earlier this week of 17 members of a 38-member executive committee who demanded Sanchez's resignation to help break the nine-month impasse.

Sanchez has led a stand-off with acting Prime Minister Mariano Rajoy's conservative People's Party (PP), which won the most votes but fell short of a majority in two inconclusive elections, and the dispute has frustrated attempts to form a government.

If no government is formed before the end of October, a third election will be called in December.

Sanchez suggested on Friday that he could resign if the party's assembly votes against him on Saturday and decides to abstain in a future confidence vote to let Rajoy -- his long-time foe who he accuses of corruption -- stay in power.

It is not clear whether such a vote will take place as Sanchez's critics, led by the powerful head of the Andalusia region Susana Diaz, say an interim management of the party should first be ushered in.

"NO TO THE PP"

The Socialist rebels arrived on Saturday at the party's Madrid headquarters ringed by police to chants of "No to the PP" from a mass of pro-Sanchez militants who had come from all corners of Spain. They accused the rebels of launching a party coup and playing into Rajoy's hands.

"If the PSOE indirectly deliver power to the PP, it will mark the party's suicide," said Martin Sagrera, 80, a veteran Socialist who was handing out banners reading "No is No."

The rebels hope that by ousting Sanchez, who has presided over a slump in the party's support, they could seek ways to end the country's stalemate, including a potential abstention in a confidence vote on allowing Rajoy a second term.

They say the party's executive committee should now be dissolved given less than half its members remain and that an interim management should organize a party conference to pick a new leader in a few weeks.

Sanchez, however, wants to open up a party leadership race in October, which he would likely win with grassroots support.

As the two warring sides came together on Saturday, there were few signs they would reach a decision easily. The meeting of some 300 party members started three hours late due to disagreements over exactly what would be voted on.

"What I hope for is calm, good sense and that the necessary debate takes place and that at the end all of us are willing to unite and not to fracture," Patxi Lopez, a senior Socialist and Sanchez ally, told reporters on arriving.

(Additional reporting by Rodrigo de Miguel; Editing by Julien Toyer and Helen Popper)